Wednesday, August 3, 2016

Student Debt Continues To Be A Problem

Growth In Student Debt Continues Its Rise
With the Presidential election moving closer it is again time to revisit the subject of student loans. This subject is important for several reasons and often becomes part of the political debate when those running for office begin to pander and use cheap loans or what might be seen as "free money" as a way to buy votes. My search for charts showing current data on outstanding loans proved difficult because I found little in they way of recent charts and that most were published several years ago. At that time the talk about "rising student debt" was more in our face. Today the issue has become how we should handle this debt.

Originality, the idea was that a student should be able to get a loan to help pay for university tuition, books, and basic living expenses. It seems, however, that many students are borrowing against their future at an almost unimaginable pace and using the money for things other than education. Too many young people and even older people are taking student loans but have expanded "living expenses" to include cars, trips, vacations and more. All this has a very dark side that will affect the lives of these borrowers going forward and has the potential to grow to crisis dimensions in the future. Society is in some ways encouraging young people to take on this debt and to hock their futures. This is akin to the, "I will gladly pay you Tuesday for a hamburger today" way of thinking. While it serves the propose of keeping large numbers of young Americans off the unemployment roles, it creates huge problems we cannot ignore as much of this money is being poorly spent.

I personally have witnessed several of these students rent an apartment, fail at school, and then be forced to move back in with parents when the money ran out. Sadly, like the gifts from pawnbrokers and payday loan sharks, many of the borrowers will live to regret taking this easy money. The burden of paying for these college loans is even beginning to encroach upon and  wreak havoc on the finances of an unexpected demographic: senior citizens. Reports show a surprising number of Americans 60 and older still owe about $36 billion in student loans, this information provides a rare window into the negative dynamics of student debt. More than 10 percent of those loans are delinquent. As a result, consumer advocates say, it is not uncommon for Social Security checks to be garnished or for aggressive debt collectors to harass borrowers in their 80s over student loans that are decades old.
Student Debt Can Haunt People For Years Or Decades
Researchers indicate Americans may be struggling with student debt far more than we thought. According to the Federal Reserve Bank of New York rates for student loans in serious delinquency increased from 11.1 percent to 11.5 percent in the second quarter, but that does not reflect the whole picture of student loan debt. While that rate is more or less in line with other forms of consumer debt like credit cards and mortgages, it understates the problem because almost half of student debt is currently in deferment, in grace periods or in forbearance. This means they are "temporarily" not in the repayment cycle. If all loans were in the repayment cycle, delinquency rates might be roughly twice as high as reported. Please note, while in those approved grace periods they are rated as current, however, interest is being added to the balance.

Once researchers exclude those loans to more accurately reflect the pool of borrowers who can actually be late, the delinquency rate more than doubled. In the end, 27 percent of the remaining borrowers were late on their payments, totaling about 21 percent of the aggregate loan balance. The Fed’s data from its 2013 Household Debt and Credit: Student Debt report shows how student loan delinquency rates are higher when considering loan deferments and forbearance.
Key findings from the report (with data from the fourth quarter of 2012) include:
  • About 44 percent of borrowers were not yet in repayment due to deferments and forbearances. Excluding those, the effective 90+ delinquency rate rises to more than 30 percent.
  • About 17 percent of borrowers were past due on their student debt more than 90 days in 2012, a large increase from under 10 percent in 2004.
  • The transition rate of borrowers in repayment from current to delinquent has been rising since 2008 from around 6 percent to nearly 9 percent.
In an opinion piece published in USA Today last year, Mitchell D. Weiss from responded to the Fed student loan delinquency data by stating that, “Although student loans make up only 10 percent of all consumer debt, the amount of seriously past due student loan payments total nearly one-third of all seriously past-due debt payments. What’s more, of the total $1.19 trillion in outstanding education-related loans, only about half that amount is actually in repayment at this time (the balance is deferred because the borrowers are still in school.)”

Student debt has become such a hot-button election year issue that it might even sway the results of the election. This is an area where pandering politicians claiming to feel the pain of those burdened or concerned about college cost can in effect buy votes by promising a  favorable fix. All this gets sticky because shrewd politicians have framed the issue in a way that stirs the voter's emotions. Student loans have received considerable media attention over recent years with growing concern about the crushing debt loads assumed by students and their parents. Petitions circulating online to forgive many student loans have collected a huge number of signatures. This also has become an area of  resentment or a question of fairness to many voters who have actually paid their debt.

Government affects the cost of higher education in many ways such as subsidizing the budgets of public colleges and universities. Federal and state governments give money to students through programs like Pell Grants and the American Opportunity Tax Credit. Below-market interest rates for student loans is just another subsidy mechanism. Like the government programs involved in supplying people with paid healthcare making cheap government loans available for education encourages people to consume more than they otherwise would. While many would argue that this is a good thing it also causes some negative distortions in that it encourages students at the margin, to choose more expensive educational institutions than they otherwise would, and to finance more of their education with borrowing. These incentives leave students burdened with debt and also makes them less focused on price than they should be.

When government money begins to flow into a system it often results is higher cost, in education, many people see the government loans as a driving force behind tuition inflation. Instead of extending the policy of holding Stafford Loan interest rates very low, it might be better to let rates go back up and redirect the cost of the subsidy into an expansion of Pell Grants and refundable tuition tax credits. This policy would keep the positive distortion associated with Stafford Loans (people get more education) without the negative ones such as people are less price sensitive and borrow more money. The clear instinct of many politicians is to defend cheap loans in an effort to be on the side of education. But subsidizing education need not mean subsidizing borrowing. We’d be better off searching for ways to drive the cost of higher education down with innovations like the shift to more online textbooks and classes.

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